Economic Inequality Running Rampant in U.S.

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Congress returns from its April recess this week with financial reform at the top of its to-do list. With millions of Americans still bearing the brunt of the worst recession in 80 years, Congress needs to start protecting our economy from Wall Street excess, and repair the shredded social safety net that has allowed the Great Recession to exact a devastating human cost.

Big banks are an economic parasite

In an excellent multi-part interview with Paul Jay of The Real News, former bank regulator William Black explains how the financial industry has transformed itself into an economic parasite. Black explains that banks are supposed to serve as a sort of economic catalyst—financing productive businesses and fueling economic growth. This was largely how banks operated for several decades after the Great Depression, because regulations had ensured that banks had incentives to do useful things, and barred them from taking crazy risks.

The deregulatory movement of the past thirty years destroyed those incentives, allowing banks to book big profits by essentially devouring other parts of the economy. Instead of fueling productive growth, banks were actively assaulting the broader economy for profit. None of that subprime lending served any economic purpose. Neither do the absurd credit card fees banks charge, or the deceptive overdraft fees they continue to implement.

As Matt Taibbi explains in an interview with Amy Goodman and Juan Gonzales of Democracy Now!, banks didn’t just cannibalize consumers. They also went directly after local governments, bribing public officials to ink debt deals that worked wonderfully for the banks, and terribly for communities. In Jefferson County, Ala., J.P. Morgan Chase helped turn a $250 million sewer project into a $5 billion burden for taxpayers. The deal generated nothing of value for either citizens or the economy, but J.P. Morgan Chase was still able to line the pockets of its shareholders and executives. This kind of behavior was illegal, but the transactions involved were complex financial derivatives, which are not currently subject to regulation. To this day, nobody at J.P. Morgan Chase has been prosecuted for bribery or corruption.

Congress set to avoid tough regulations

There is a clear need for Congress to enact some firm restrictions against risky and predatory bank activities. But at the behest of Treasury Secretary Timothy Geithner, Congress is doing its best to avoid inserting any hard terms in legislative language, instead leaving the specifics to federal regulators to work out. As Tim Fernholz emphasizes for The American Prospect, this is an exercise in futility. Regulators already have the power to impose more stringent rules on nearly every arena of Wall Street business that matters (derivatives are a very noteworthy exception). If they wanted to fix things, they could do it without Congressional help. The trouble is, the financial sector has polluted most of the regulatory agencies, so that many regulators now act more like lobbyists for the banks they regulate, rather than law enforcers. Indeed, as I note for AlterNet, the top bank regulator in the U.S. spent over a decade lobbying for the nation’s largest banks before taking up his current job. If Congress doesn’t establish firm rules, regulators under future administrations would be free to simply undo any measures that the current agencies actually implement.

Megabanks equal mega risks

As Stacy Mitchell illustrates for Yes! Magazine, most of the problems in the financial sector are connected to the size of our banking behemoths. Big banks have enormous power—if they fail, the economy goes off a cliff. As a result, any responsible government wouldn’t allow any of our megabanks to actually fail. But knowing that the government will protect them from any true catastrophes, big banks take bigger risks—if the risk pays off, they get rich, if it backfires, taxpayers will suck it up. That puts the interests of big banks at odds with the public interest, and creates an economy where bankers don’t try to finance useful projects with a safe and steady return, but instead back crazy bets that just might pay off.

You can’t fix that problem with regulations or idle threats of taking down a big bank when it gets itself in trouble—the markets won’t believe it, and the banks will still take risks. The only solution, Mitchell notes, is to break up the banks into smaller institutions that can fail without wreaking havoc on the economy.

Economic inequality weakening the economy

All of this ties into rampant economic inequality in the United States. Since the 1970s, conservatives have waged a constant battle on the social safety net, shredding protections for ordinary people, while empowering corporate executives to take advantage of them. In an illuminating blog post for Mother Jones, Kevin Drum highlights the fact that average income has only rose from about $20 an hour in 1972 to $23 an hour today. This isn’t because workers were slacking off—productivity has increased at roughly five times that rate. In other words, nearly all of the economic gains since the Nixon era have accrued to the wealthy.

When people don’t have access to strong and improving income, they finance things with credit. But if wages never actually improve, that debt becomes a significant burden. When an entire society finds itself overly indebted, people stop buying things, and the economy tanks. The predation in the American financial sector makes this problem even worse.

But political theatrics are even trumping efforts to provide relief to those hit hardest by the recession. Sens. Jim Bunning (R-KY) and Tom Coburn (R-NE) have blocked the extension of unemployment benefits twice in the past month. As Kai Wright emphasizes for ColorLines, that recklessness puts up to 400,000 Americans at risk of losing their unemployment checks. That’s a human tragedy—hundreds of thousands of people will have no way to pay the bills. It’s also bad for business, since those people won’t have any money to buy things that businesses produce. It is, in short, short-sighted economic insanity.

The economy is supposed to work for everybody, not just the rich, not just bankers. For that to happen, politicians have to establish meaningful regulations to make sure finance works for the greater good– and safety nets to make sure that anyone who falls through the cracks doesn’t see her life prospects permanently diminished.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint.

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47 comments

I think it is high time that a task force gets established, to try and work out means of curtailing the obscene profits made by big banks.
Any such action will be supported by 99% of Americans, or any other nation's people, I am sure!

These sad facts have been presented many times in many ways. But our politicians -- including the White House -- seem deaf to our calls for change. Maybe it is time to quit complaining to the Democrats and Republicans, and form a third party. Remember it was a small third party, later called the Republican Party, that was formed to (primarily) get rid of slavery, when the Democrats and Whigs couldn't do the job.

Here we have the Lords of Wallstreet raping the peasants all over again! How far have we really evolved as a country when "by the people for the people" only applies to the ultra wealthy? And gee... average hourly wage of $23 an hour??? Try working in Maine where you're lucky to make over the minimum wage even WITH a college degree. How do we reform a country run by corporations into a true Democracy? Perhaps we need to find ways to buy locally and barter to support our own communities to get them healthy again. The problem here is that we rely so much now on pieces of paper and virtual money with online banking. Corporate America knows they can own us financially and materially. Let's rally to break the cycle!

While the US is not ready to discuss it yet, a leading factor in our economic disparities is our welfare "reform." This has proved to be a powerful tool for suppressing wages. Before "reform," some 80% of AFDC recipients were able to voluntarily quit welfare in under 5 years, precisely because the economic stability and services made available to them made it possible for them to get a foothold and work their way pout of poverty. Since we stripped out those vital supports, very few are able to work their way out of poverty, and they remain (at best)
locked into temporary, bottom-wage labor, trying to support families on under $6.00 per hour. As a result of social/economic policies, the number of poor in the US continues to grow as corporate profits continue to soar.

While the US is not ready to discuss it yet, a leading factor in our economic disparities is our welfare "reform." This has proved to be a powerful tool for suppressing wages. Before "reform," some 80% of AFDC recipients were able to voluntarily quit welfare in under 5 years, precisely because the economic stability and services made available to them made it possible for them to get a foothold and work their way pout of poverty. Since we stripped out those vital supports, very few are able to work their way out of poverty, and they remain (at best)
locked into temporary, bottom-wage labor, trying to support families on under $6.00 per hour. As a result of social/economic policies, the number of poor in the US continues to grow as corporate profits continue to soar.

i heard on my worldband radio that many of the banks in the former eastern bloc did quite well because they stayed simple and had almost no ties in risky stock ventures.
kinda sad all those dig degrees on wallstreet and the capital and yet they never studied history.

No laws for the rich. It just amazes me that they have this much power over the government. They can rob us all and come out "smelling like a rose". They have been doing it for 30 years. White collar crimes are not new, but have increased exponentially in numbers. Why is there no accountability? We have to ask our government. If the government is not going to change any of these illegal activities, I think that the American people should start filing, huge, class action lawsuits.

How many of us have had our retirements stolen, or lost our jobs and our homes? We need to start protecting ourselves. It is clear that nothing is going to happen if we don't. Let them know that we will not tolerate it any longer.

Wall Street, and indeed all of Manhattan, have been taking the entire world for a ride for generations. Their lapdogs, Congress, support the extortion in return for a rake-off. Do you think that they will ever change the corrupt set-up? Not a hope! Your entire government is rotten to the core.

Some good points in the article and the main problem is deregulation of Wall Street and the big banks and other credit-institutions.It's imperative that these has to be controlled on a worldwide basis.